The FD takes control

When Lesley Jackson, FD at cider maker HP Bulmer, stood up before an audience of young accountants recently, she painted a vision of the skills needed by FDs of the future. “Apart from technical knowledge, you will need commercial awareness. That means being able to stand in the shoes of a marketing or sales director to provide them with the financial advice they need – in their context,” she said.

Jackson also argued that FDs need to be good communicators. “If you cannot relate to people, it doesn’t matter how good an accountant you are. The difference between success and failure lies in implementation,” she said.

“You can be the best strategist in the world but that would not necessarily make you a good finance director. In order to implement strategy you need people skills. That is what makes you a leader.” The FDs of the future lapped up Jackson’s advice. But how many existing FDs should also be taking note of her arguments?

The debate about the future of the finance function has been rumbling on for years. A key marker was the ICAEW’s report, CFO of the Future, published in 1998. There is now a wide appreciation among senior finance professionals that number-crunching skills are not enough for the future.

But there is less agreement on what new skills are most important. And, worryingly, there is not much evidence that FDs are making sufficient effort to adapt their skill sets to meet new challenges.

But what will these new challenges be? Martin Fahy, senior lecturer in accounting and information systems at the National University of Ireland, Galway, says one scenario for a typical finance function is this: transaction processing is outsourced to Accenture and PwC, internal audit is run by KPMG, risk management is done by Deloitte & Touche and strategy is handled by a couple of guys from McKinsey and a woman from Goldman Sachs – leaving the FD responsible for very little.

This vision of a stick-thin future finance function may sound extreme, but it taps into trends that are already with us. Is this outsourced and atomised vision of the finance function going to provide the strategic synergies which could be the key to future competitive advantage? And what does it say about how an FD should adapt for the future?

The challenge for FDs is to carve out a new role, close to the strategic heart of the business, Fahy argues. “The only sustainable source of competitive advantage in the future is going to be the quality of strategic management,” he says. “FDs need a better understanding of the business model they’re faced with. They need to get more involved in direction setting and business learning. They must shift from their current focus on doing things right to look at whether they are doing the right things.”

This requires FDs to acquire a raft of strategic skills. “FDs need to monitor supply chains and identify value-creating products, channels and customers, as well as value-destroying activities. From a financial standpoint, the essence of strategic management is recycling capital away from value-destroying activities towards value-creating ones,” says Fahy.

The need for strategic skills is a theme of The Role of the Chief Financial Officer in 2010, a report prepared by New York-based IFAC, the International Federation of Accountants (for more on the report, see also page 26).

FDs interviewed for the report argued that finance professionals would need “strong personalities and a wide understanding of markets”. For example, Tony Isaac, the former CFO of industrial gases giant BOC, who became its CEO, says: “In the future, much of the CFO’s role will include strategic planning, financial planning and risk management.” But if they are to become better strategists, FDs will need to raise their game in two respects.

First, as Jackson points out, they will need better people skills in the general sense of being able to communicate more effectively, especially with fellow directors and other senior managers. The other skill is the ability to delegate and let go of detail.

Partly, delegation will happen if more functions are outsourced, as envisaged by Fahy. But it is also true that too many FDs seem to gain a sense of comfort from dealing with mundane technical issues. This is doubly damaging because it diverts the FD away from the bigger picture and stifles the development of lower-tier managers in the finance function.

What may worry more than a few FDs is that the kind of skills shift implied by these changes is more than a minor touch on the tiller. To become a high performer in tomorrow’s business, some FDs will need to re-invent themselves. Terry Carroll is a former FD (of the old National & Provincial Building Society, which became part of Abbey National) who now coaches FDs for their new roles. He has just written the third edition of The Role of the Finance Director (published by FT Prentice Hall). He says: “FDs should go back to basics and understand more about themselves if they are to make the kind of changes they need to thrive in the new business environment.”

Carroll was speaking after two days coaching the FD of a FTSE-250 company. He started by talking the FD through 49 “filters” – factors which influence the way somebody looks at the world around them. These include whether a person is an introvert or extrovert, thinker or feeler. A key filter for FDs is the ability to analyse downwards and extrapolate upwards from a given point. Carroll calls this “chunking”. He says: “This shows whether somebody is more focused on the detail than the big picture. Generally, FDs are focused on the detail. But in future they need to see the big picture.”

So what did the FTSE-250 FD learn from his two days? “First, he was better able to understand the structure that makes up all human beings, which gave him more choices about other human beings. Secondly, he was able to understand his specific combination of the 49 filters and make choices for himself, not only in his workplace but in his personal life. Thirdly, he was able to learn and practise new skills which should be relevant for a broader role in his company,” says Carroll.

New skills such as? Influencing is critical for the future, Carroll suggests.

“In the past, FDs have influenced people by saying, ‘No, you can’t have the money.’ In the future, they need to argue their case with different parts of the company, and specifically their fellow directors, more persuasively,” he says. In short, as power diffuses through a devolved business, they need to convince, rather than instruct.

Norman Lyle, a former president of the Chartered Institute of Management Accountants and group FD of Jardine Matheson in Hong Kong, is quoted in the IFAC study. He says: “CFOs will need the conviction and courage to stand up to their colleagues. For example, if a proposed acquisition doesn’t make sense, a CFO needs to be able to articulate why this is the case and hold his corner.”

Another key skill, especially post-Turnbull, is managing risk. Some FDs are still coming to terms with what this means. Carroll argues that effective risk management ranges beyond what most FDs recognise – namely, managing financial or insurance risks. “What I mean by risk management is understanding at both a strategic and practical level what risks the company is running, and then managing with an awareness of them,” says Carroll. “Of course, if you try to eliminate too many risks, you lose opportunities to make rewards.”

Confident FDs who are making the skills shift seem certain their status and influence in their organisations will rise. But those who fail to re-skill quickly face an uncertain future. It could soon become apparent to fellow board members that their contribution does not match what is needed in challenging business conditions. And, if a board is faced with damaging the company or ditching the FD, it is not going to agonise long over the decision.

TEN TOUGH QUESTIONS FOR FDs

Do you have the skills to be a modern, influential, strategic FD? Here’s our checklist.

Strategy: Can you explain your company’s business model in a few words, saying why it works and what changes may be needed to it in the future?

Commercial awareness: Could you describe three key moves competitors have made in the past year which may affect the market for your company’s products or services?

Value-based management: During the past three months, how much time have you spent looking for ways to redirect investment into activities that add more value?

Change management: What are the top three changes you hope to make in the finance function in the next two years and how will they make the company more competitive?

Leadership: What qualities do you need to develop your leadership potential? How will you acquire them?

Influencing: Which necessary financial policies will meet the toughest opposition in other parts of the company and what arguments will you use to overcome it?

Stewardship: Are you satisfied with the processes you have in place to ensure effective stewardship of your company’s assets and information, and how might you need to improve this stewardship in future?

Technology: Are you comfortable that the finance function is reaping full benefit from its investment in IT and in what ways will you need to extend your IT skills?

Risk management: Are you confident you fully understand the major risks facing your company and what steps are you taking to broaden your understanding of any new risks that may arise?

Communication: Are you satisfied with the way you communicate and negotiate with investors and capital markets? What new skills will you need to perform this work more effectively in the future?